Week 10: Is the traditional measure of Gross Domestic Product a Satisfactory
Measure of Economic progress? What are the problems with the measure?
Discussion/Introduction:
There have been numerous criticisms of the shortcomings of GDP as both an accurate
and meaningful measure of economic growth.
To understand the context, take a look at the origins of GDP as an economic indicator:
1.Origins of Gross Domestic Product as a measure of Economic Progress and growth
Gross Domestic Product became institutionalized during the Great Depression as an
attempt to measure the U.S. economy’s overall progress in the output of goods and
services.
Comprehensive measures of national income and output did not exist during the
Depression; thus, efforts to obtain such a measure of how well the economy was
performing
The Department of Commerce – the agency that conducts GDP measurement to this
day – summoned economist Simon Kuznets to develop the nation’s first national
economic accounts. The first measure developed was a National Income measure.
 *Summarize how national income is measured – its components); wages and
salaries; proprietors’ income; corporate profits; interest earnings; income to
gov. – tax revenue.
 What is not counted as income -re-sales of used goods; sales of stocks/bonds;
income from illegal activities.
By the early 1940’s, the nation wanted a more accurate measure of national output
(product) and expenditure estimates to accommodate its War planning efforts.
By the mid 1940’s, the two measures – national product and national income
accounts were in place and have been used ever since.
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Despite some modifications to measurement (such as accounting for the effects of
inflation on growth), little of substance has changed in the way GDP is measured since
its beginnings in the mid-1940’s.
According to the traditional economic perspective that has come to be widely
accepted since the origins of GDP, “growth is good.” Growth of output of goods and
services is widely viewed as an indicator of economic health.
However, even Kuznets argued in a statement to Congress in 1934 that ‘“the welfare
of a nation [can] scarcely be inferred from a measure of national income.”’1
2. Why has GDP come under increasing scrutiny as an effective measure of economic
health in recent years? Much of the emerging critique argues that growth is not
necessarily good. Why not??
Two analysts who have offered a recent critique of GDP’s shortcomings2 have noted
that “A human economy is supposed to advance well-being.” But economic well-being
is rarely talked about in terms of the ‘well-being’ of society. Instead, the emphasis is on
‘expansion’ and ‘growth’ typically requiring ‘”spending more money.’”
So a central part of the criticism lies in how “economic growth” has come to be
defined in the first place.
 According to the traditional assumptions about economic health, “It makes no
difference where the money goes, and why. As long as the people spend more
of it, the economy is said to "grow." (Rowe and Siverstein; Washington
Monthly)
So in what ways is growth NOT good? [based on the Rowe and Silverstein reading]?
One answer to this question lies in the question of what’s growing?
 Obesity: Often associated with increased health care costs due to higher risks of
heart disease, stroke, high blood pressure, diabetes and other ailments; what is
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Garrett C. Groves and Michael E. Webber. 2010. Voices: Greening the Gross Domestic Product
Jonathan Rowe & Judith Silverstein. 1999. The GDP Myth Why "growth" isn't always a good thing, The Washington
Monthly, Washington, D.C.
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often preventable becomes an increased cost on the society and economy
overall in missed workdays, shortened life span, and lost productivity
 Inequality: according to the OECD3, GDP “measures income, but not equality.”
GDP growth tells us nothing about how the benefits of the increased wealth
created in the economy is distributed. In fact, increasingly, that distribution has
become increasingly unequal. So does GDP growth necessarily mean we are all
better off?
 Consumer debt: Thanks to stagnant wages following the recent economic
recovery, consumer debt has soared; According to Rowe and Silverstein, “It has
grown 73 percent since 1993 and is now some $1.5 trillion, which is about the
size of the economy of France”. The note that this figure “… doesn't even count
home mortgages, which add about $3.8 trillion more”.
“The average American household has 11 credit cards and owes some $7,000
on them at any given time, plus the car loan and the mortgage”.
 Worse quality of life – measured in terms of increased road congestion which
contributes to pollution and further preventable medical costs resulting from
higher incidences of “asthma, bronchitis, and other breathing problems”.
 Stress: Rowe and Silverstein’s critique also point out that as GDP has risen and
the economy has expanded, noting that “Americans have felt more harried and
under siege.” They cite statistics that the demand for drugs to relieve stress has
resulted in a $6 billion industry in sedatives, tranquilizers and other treatments.
 Inadequate accounting for resource destruction*: Most importantly, the
current method of measuring economic progress has no methodology for
accounting for the loss of resources as a result of the destructive effects of
consumption and production in the U.S. economy.
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OECD. Is GDP a satisfactory measure of growth? OECD Observer, Jan. 27, 2014, retrieved from
http://www.oecdobserver.org/news/printpage.php/aid/1518/Is_GDP_a_sat
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*What are some of the critiques that the OECD article offers about GDP?
o The OECD article notes that GDP “…measures growth, but not
destruction”
o “ignores values like social cohesion and the environment”
o “Exclude(s) the output of domestic work that is carried out in the home.
We do not consider, for example, that taking care of one’s own children
is production, whereas we do when a hired nanny does the same work”.
o Further, there are no “statistics available on the underground economy.”
(activities that are not counted)
*Why should this issue matter to measurement?
3. Another reason that the assumption that ‘growth is good’ has come under
increasing scrutiny in recent years has to do with the inadequate accounting for
resource destruction – an issue that has far-reaching implications for …how we should
measure the environmental impact of producing goods and services. .. neither GDP
nor this balance sheet takes account of environmental degradation.”
“Transforming Cultures: From Consumerism to Sustainability”
https://www.youtube.com/watch?v=KoqjztZjkWc
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